From community shares to regional pension funds: How crowdfunding is changing investment forever

I am City A.M.'s deputy business features editor. I look after the Entrepreneurs page, Alternative Finance and our Office Politics section. I also help out with the Forum, running our daily debate. I have a special interest in distributed ledger technology. Prior to working at City A.M., I ran a social enterprise.

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Several local authorities are already looking at establishing British wealth funds (Source: Getty)

Harriet Green

If you're an optimist, you’ll likely think that we’ve only seen the start of what new technologies can offer – and change. Although growth across alternative finance has slowed in the past 18 months, the models found in the industry have continued to evolve at pace.

One such development was announced last week. Crowdfunder, one of the UK’s largest crowdfunding platforms, has launched a linking service between crowdfunding projects and local councils, companies and community funds that offer grants or sponsorships.

Traditionally, donation and rewards-based crowdfunding have provided members of the general public with a way to contribute towards projects that benefit their local community or one which they have an affinity to. This new model will enable Joe Public to effectively vote on local projects – making donations themselves and thereby signally where council cash should go.

Having raised £2.4m nationally from various councils interested in rolling out the scheme, Crowdfunder has already done a trial in Plymouth, called, unsurprisingly, Crowdfund Plymouth. Over the past 12 months, Crowdfund Plymouth has raised over £430,000 from 4,550 people to fund 101 approved projects across the city.

Approved projects are listed on the Crowdfunder website and launched to funders and the public. Then high-performing projects validated by the crowd (i.e. 25 per cent of the funding target is raised from them) can “unlock” sponsorship/council funding. People can continue donating after funder money has been pledged to help the project reach its target.

“Increasingly, we’re seeing a funding cocktail for projects, and this is very much led by the crowd,” says Phil Geraghty, managing director of Crowdfunder. “We’re also seeing a lot of larger corporations getting involved. Communities now have the opportunity to effectively match funds alongside traditional funders. Given the conversations we’ve been having, I expect it to develop a lot more over the next 24 months.”

One of the benefits of the model is the efficiency it brings for councils, many of which have dealt with cutbacks in recent years. Raising via a platform means a streamlined process: the technology enables a far slicker process of collection, allocation and distribution and sees funds distributed more quickly.

And the donor base has been interesting too. Jess Ratty, also of Crowdfunder, says that one of the outcomes of the Plymouth scheme has been that “quite a high level of pledging came from the most deprived regions of the city”, with residents realising that being involved means they can vote with their feet, and feel involved with skin in the game.

Deep ripples

The implications of what Crowdfunder is doing could be more extensive than one might initially think.

For starters, the development of investment vehicles in the industry was already happening fast. Last year, P2P lender Funding Circle raised its first fund. And this year, equity platform Syndicate Room also launched a fund, enabling retail investors to spread their investment across businesses raising on its site.

The government launched the Innovative Finance Isa this year, and debt-based platforms offer deals that can be included in Sipps. Combine this with the Crowdfunder model, and it isn’t an enormous mental stretch to envisage, say, regional pension funds.

As with the Crowdfunder model, people could signal which projects they’d like to see investment in. “If you’re looking at how to allocate money, you need an independent infrastructure, and the crowd is as good a way to form that as any,” says Chris Sier, director at FiNexus.

One way he thinks we could see this happen is via local government pension schemes. Several authorities are already looking at establishing British wealth funds – the innovation would be the role of the crowd. “The concern would be that localisation goes against investment maxims. But it doesn’t need to be that way. If a local authority has £2.5bn, you can imagine how far even just 1 per cent of that would go on local projects,” says Sier.

And regional funds could keep more money on the ground. “In an institutionalised world, we’ve aggregated responsibility to institutional fund managers. Bear in mind that, currently, around 5 per cent is being taken out of a pension fund by a manager who’s producing perhaps marginal value,” adds Sier.

Small, efficient future

The next step will be investing local funds in local projects on a performance basis, rather than just for the feel-good factor – vital if it’s going to be sustainable. Crowdfunding, however, is already proving how this line can blur. A virtual reality headset company that raised money on Crowdfunder earlier this year was so impressed by the people of Plymouth’s commitment to it that it has pledged to remain based in the city for the next five years, re-skilling and improving the local economy.

Crowdfunder has already introduced community shares, which enable people to own, and thus make a return from, businesses near them. It’s patient capital, with funds often locked up for several years, but it’s a further incentive for helping a business do well. Examples include a Suffolk pub and the GlenWyvis Distillery.

Moreover, big business is starting to get involved. Virgin Media Business is working with Crowdfunder, for instance, and both Geraghty and Sier stress the increased interest from individuals in match funding alongside traditional funders. Highly focused localised funding projects, in collaboration with local shareholders, raise interesting questions for large firms fatigued by entrenched CSR programmes.

This shift is part of “an increasing interest in the ‘hyper-local’ – localism at the level of the individual,” says Geraghty. He points out that, until now, the internet has predominantly been used to help us reach as far across the planet as possible. Now, it’s helping us to connect better with those around us.